Consider All Options When Planning for Home Improvements

With summer just around the corner, now is the time to start planning your summer projects. As you consider your budget, remember to keep your financing options in mind, such as considering a personal loan, line of credit or tapping your home equity or savings, or using your income tax refund.

To help you plan and make confident financial choices, here is some insight regarding each option.

Tapping savings for home improvement

When it comes to using savings to pay for home improvement, the bottom line is, well, the bottom line. If you’re a conscientious saver who has substantially more than six months’ expenses saved, you might consider funding smaller home improvement projects with the excess savings. But remember – we call them emergency funds for a reason. Resist the urge to tap your core savings for planned home improvement. Save those funds for unanticipated costs.

Personal loans and personal lines of credit

With a personal loan, once your loan application is approved, you receive the entire amount borrowed, and you start paying interest immediately on the full amount of the loan. You will have a fixed schedule of payments, and the payment amount will decrease until the loan is paid off.

A personal line of credit is a flexible borrowing option, similar to a credit card. There are no payments until you access your line of credit, and you can draw on your line of credit by writing a check. You are also able to borrow any part of your credit line again once you have repaid the amount previously borrowed.

Home equity loans and home equity lines of credit

Like personal loans and personal lines of credit, home equity loans and home equity lines of credit differ in how you access the money borrowed and payment schedules.

But while personal loans and personal lines of credits are offered based on your credit history, home equity loans and home equity personal lines of credit are extended based on the amount of equity you have in your home. Another difference is interest rates. Home equity loans have fixed interest rates, while home equity line of credit interest rates can fluctuate.

Choosing between a home equity loan and a home equity line of credit generally depends on how you plan to use the money. If you have a big “I will only do this once” project in mind such as an addition, a home equity loan might be an option. If your plans are smaller scale – say you want to remodel the kitchen and over time you want to replace windows, a home equity line of credit might be in order.

Putting income tax refund to work on your home

Again, it’s really a question of how much you will receive, and the best use for it. You could use your return to pay for smaller home improvements, particularly those that might yield tax breaks down the road. But before you make that commitment, take a look at your other needs, such as paying down debt, tucking money away for education costs, or building your emergency savings.

Ultimately the choice you make will depend on your personal situation and long-term financial goals.

Leo Palana manages the Mercer Island branch.